Every commercial lease has a sentence that reads like this: “… at the end of the lease term, the Tenant must return the leased premises to the Landlord in the same condition as when the lease term began, normal wear and tear excepted.” Sounds pretty simple. But what about all of the improvements you made, like cabinets, lighting and partitions?” Those improvements weren’t there when you signed the lease. So, returning to the “same condition” may not include those improvements. Who pays to remove them and return your space to its original condition?” Most likely, it’s you.
Did you sign a personal guarantee? That guarantee likely reads something like this… “owner guarantees the Tenant’s full performance of all the terms and conditions in this Lease…” Which means that you, personally, guarantee that the space is returned to its original condition.
What to do:
Be certain that your lease says: “Tenant must return the leased premises in the same condition as found at the beginning of the lease term, EXCEPT: …………” Spell out what you’re not required to remove or repair.
It’s really that simple.
As much as I like to disagree with the FASB, I think they hit the nail on the head with this Exposure draft. I have had to revlaue leases many times, and interestingly enough, not for work, but for personal investment. With so many firms financially vested in their leases as a capital lease, yet structured as an operating lease, it only makes sense to convert the treatment of these leases whenever feasible. The problem herein lies when many investors (i.e. the vast majority of them) either are not aware of how many firms treat capital leases as operating leases, or they have some knowledge and fail to follow through with making the lease conversion to make an informed financial decision. A great industry example here is the airline industry. The bulk of airplanes that are actually leased (and not owned) are operating leases, yet the way the airplanes are used, financially and physically, these should be treated as capital leases. This can have an impact on earnings and stock value to an investor that can be very insightful, and moreover, provide an edge when the decision to trade that security is a tough decision.